Will Yellen Resign If Trump Wins

Perhaps the most memorable aspect of Monday's presidential debate from a policy standpoint, was Donald Trump's latest attack on the Fed, and its chair, Janet Yellen. As a reminder, Trump repeated a claim he has made before, saying the economy was in a "big, fat, ugly bubble" and went straight for Yellen when he said: "And we have a Fed that's doing political things. This Janet Yellen of the Fed." He also gave his version about what might happen next at the Fed.

"On the day Obama goes off, and he leaves, and goes out to the golf course for the rest of his life to play golf, when they raise interest rates, you're going to see some very bad things happen, because the Fed is not doing their job. The Fed is being more political than Secretary Clinton."

This puts Yellen in a bind. As AFR's Philip Baker writes, "Trump's attack on the Fed chairwoman during this week's presidential debate was so vicious that Paul Ashworth, chief US economist at Capital Economics, now thinks it's possible Yellen will have to resign if Trump ends up becoming president."

While Trump has criticised Yellen in the past on numerous occasions, on Monday night be upped the ante "big league" - Ashworth argues that the "veracity" of the claims are "irrelevant" and it doesn't even matter if Trump himself doesn't really believe what he said.

"It's all to do with how voters react to his comments", Ashworth notes, adding that "if those claims are made publicly to a viewing audience of up to 100 million Americans, and a majority of those Americans then go on to vote for Trump in November's election, then what choice does Yellen have? It's true that Yellen might still have the support of Congress, but she could not argue that she enjoys the confidence of the American people" he wrote in a note to clients.

To be sure, Yellen isn't the first head of the Fed to cop it from presidential hopefuls during their campaigns. In 2011 Ben Bernanke wore a few barbs from Republican candidate Rick Perry when he was accused of "treasonous" behaviour after the Fed started its program of quantitative easing. There had also been some tension with Fed chiefs when George H.W.  Bush and Richard Nixon were presidents.

To be sure, in most respects, Trump is right and the Fed is indeed a political creature, as the following anecdote from the NYT reveals clearly:

in 1965, President Lyndon B. Johnson, who wanted cheap credit to finance the Vietnam War and his Great Society, summoned Fed chairman William McChesney Martin to his Texas ranch. There, after asking other officials to leave the room, Johnson reportedly shoved Martin against the wall as he demanding that the Fed once again hold down interest rates. Martin caved, the Fed printed money, and inflation kept climbing until the early 1980s.

But while the Fed's implicit role in US politics, and especially its funding, is nothing new, never before has the central bank played such a prominent role in every aspect of the economy, and certainly capital markets.

Which brings us back to Trump's talking point: "Trump's criticism of the Fed last night was clearly a prepared talking point. The chances are that he will return to it in the remaining two debates," Ashworth said.

So what would happen under a Trump presidency? Ashworth thinks that Yellen would resign fairly quickly as a matter of principle and it throws a spanner in the works for the Fed.

"If Yellen's resignation triggered a renewed bout of market turbulence then that would make a December rate hike less likely anyway. Even if Yellen stays, however, given his stance on both trade and fiscal policy, a Trump win could trigger an adverse market reaction that persuades the Fed to hold fire" he wrote. 

Come to think of it, for those who have railed against the Federal Reserve's for years, accusing it correctly of its encroaching takeover of every aspect of the US economy, enabling the government's nearly $10 trillion debt issuance spree since the financial crisis, not to mention its takeover of capital markets - manifesting most vividly in a hedge fund industry that is slowly imploding having no clue how to trade today's "market" - perhaps merely a Yellen resignation would be a sufficient reason to get Trump inside the White House.  And yes, risk assets would not be happy with such an outcome.